COVID-19 AND THE CONSTRUCTION INDUSTRY

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Construction Law and Bankruptcy: Two Key Things to Know

The construction industry, like most if not at all industries, has been gravely affected by the pandemic. Whether you’re a supplier, general contractor, subcontractor, or any other member of the myriad roles the construction industry contains, chances are high that you’ve been affected in some way by bankruptcy or restructuring amongst your colleagues this year. Below is a list of two key things to be aware of to help navigate this difficult intersection of problems.

1. “Stay” of Proceedings

In any insolvency proceeding, a stay is used to stop parties from starting a new legal action against a debtor that has filed for what is known colloquially as “bankruptcy protection.” As an example, creditors cannot file (new) construction liens against a party that has filed for bankruptcy under the Bankruptcy and Insolvency Act (“BIA”).  However, a problem can occur for debtors when the same stay of proceeding is issued under the Companies’ Creditors Arrangement Act (“CCAA”).

Normally under CCAA stay proceedings, lien registrations may continue, which are highly prejudicial to the debtor because the registrations of claims for liens are usually grounds for an owner to stop any progress payments. As a way around this, courts often issue “lien regularization orders,” which are outside the normal Construction Act lien regime. These orders have no impact on the debtor’s ability to continue collecting payments, while the creditors’ rights go mostly unaffected in these unique situations.

2. Insolvent Contractors and Supplier Concerns

If you are the supplier of a cash-strapped, creditor-protected contractor, you would be correct in thinking it is a tough sell to keep extending them supplies on credit. The problem is the courts may disagree.

Normally, a stay of proceedings insulates a debtor from having their contracts terminated by their suppliers, but it also allows the suppliers to stop issuing additional credit. What it does not prevent is the courts from designating a supplier a “critical supplier” of the debtor. If a supplier is designated this, they are normally obligated to supply goods and services that are critical to the debtor’s continued operations and restructuring. Suppliers’ one bright spot here is that they are entitled to additional security, ranked higher than existing creditors.

If you think your construction business could be affected by bankruptcy, restructuring, or insolvency, you should reach out for advice as soon as possible.

Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.

Written by Jeremy Power, a lawyer in Cotney Construction Law’s Toronto office. To contact Jeremy, please email  jpower@cotneycl.com.